From May, the tattered Southern Cross ensign that flew over the bloody shootout between troopers and diggers will be displayed in the $11 million new Museum of Australian Democracy at Eureka (MADE).

Advertising film director Paul Murphy, a descendant of three Irish miners shot at the Eureka Stockade, one of whom died, said the move was akin to Ned Kelly's body recently being returned to Greta for burial.

''It's wonderful. We are vindicated. It's returned to its rightful home,'' Mr Murphy said.

Former Victoria Police detective Peter Lalor, great-great grandson of rebel leader Peter Lalor, said: ''I think it's a great thing in terms of Australian history. It's a symbol of the birth of Australian democracy and it's come back to its rightful resting place.

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''It's now where the battle actually occurred; that's where the flag was flown and where men were killed fighting for what the flag stood for.''

Peter Lalor lost an arm in the half-hour battle at the stockade on December 3, 1854, which erupted from the diggers' rejection of the crippling miners' licence fee and their call to be able to vote.

Up to 30 men, including 22 rebels, died. Thirteen survivors were accused of sedition or treason but were acquitted, and Lalor became a member of Parliament.

John King, a trooper who survived the stockade, cut down the flag and took it home and in 1895, his relatives lent it to the gallery. And there, for 117 years, the flag has stayed. In 2001, King's descendants donated the flag to the gallery - stipulating it could be displayed only there.

But after two years of negotiations between the King family and stockade descendants' group Eureka's Children, and lobbying by Ballarat-born former premier Steve Bracks, it was agreed that MADE, in East Ballarat, could house the flag in a custom-built, climate-controlled room.

MADE, with Mr Bracks as a patron, will tell the flag's story, including how it is said to have been sewn originally by miners' wives. Curator Eithne Owens told Fairfax Media the flag would be the museum's centrepiece, as the ideal symbol of Australians' struggle for democracy.

The twist is that the art gallery retains ownership of the flag. Art Gallery of Ballarat director Gordon Morrison said he couldn't guarantee that the flag would remain permanently at MADE.

He said MADE was deemed to provide good conditions to preserve the flag and to tell the Eureka story, while the Eureka Centre formerly on the site may not have. The flag's status at MADE would be regularly reviewed.

''The gallery absolutely retains custodianship of the flag so if there are issues about its handling, its presentation, its interpretation, that has to be done in consultation with the gallery.''

But Mr Murphy said it was ''stolen property'' and should be handed over permanently. He said John King had no right to it because it was the miners' property.

Mr Lalor predicted that once the flag was installed in MADE, ''it will be very hard to move it, there would be no justification for it. That's where it should be, given the fact that that's where it was raised and that's where the battle occurred.''